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Nice to see an economics textbook get money creation more or less right for once. On the other hand they haven't been able to shake off the classical view of th

Nice to see an economics textbook get money creation more or less right for once. On the other hand they haven't been able to shake off the classical view of the consumer as a utility-maximising robot (where utility is conveniently unobservable). So a step in the right direction but a lot further to go.

jljljl 9y ago
Is there an alternative view of the consumer that produces useful results?
- soVeryTired 9y ago
  The one used by advertising: the one that understands something about human nature.
  - jljljl 9y ago
    I don’t think advertising really contradicts the model: advertising grows demand for a good by increasing an individuals perceived or realized utility for the product.
    - goialoq 9y ago
      That's the key: that perceived/predicted and realized utility are different, and we focus too much on consumers horrible mismeasure of predicted utility.
    - soVeryTired 9y ago
      But that's part of the problem: utility isn't observable so it's actually very difficult to refute the model. Unless of course you posit a specific functional form for the utility function. Then you'll just have lots of trouble fitting any data you collect.
      - jljljl 9y ago
        I don’t think economists believe there is a specific functional form for the utility function (although it often has certain properies). It’s more just a useful concept for representing customer preferences.
goialoq 9y ago
Hmm? Even among fans of the book, the book's incorrect explanation of money creation is the main criticism: https://mainlymacro.blogspot.co.uk/2017/09/the-core-economicscurriculum-designed.html https://mainlymacro.blogspot.co.uk/2017/09/the-core-economic...
- digi_owl 9y ago
  That seems to focus on the wrong section. Section 10.8 illustrates how commercial banks create money by lending. What the blog entry you linked to talk about is government deficits, and how the textbook clash with the MMT idea of governments regulating the money supply via expenditure and taxes (effectively creating money as they buy goods and services, and destroy it via taxation).
- soVeryTired 9y ago
  I was really just referring to the fact that in section 10.8 they ditched the fractional reserve / money multiplier story that you find in eg. Mankiw's book. I honestly don't know enough about government budget constraints to comment on the mainly macro post, or other aspects of MMT in general.
  - neffy 9y ago
    The standard fractional reserve/money multiplier story is provably wrong, in several different ways. With a pen and paper for example, work through what happens when loans are repaid with that cascade of banks. They missed a note that money is destroyed when the capital is repaid, and it wouldn't have hurt to discuss loan defaults, but as set out, it is definitely an improvement on the old incorrect description. (Which appears to have originated as a copy and paste error from Keynes original description in the Macmillan report.)
bllguo 9y ago
Hm. Care to qualify your statement? What do textbooks get wrong about money creation?
- stephen_g 9y ago
  A lot of them use the completely invalid 'money multiplier' model, which doesn't follow double-entry accounting rules. Even worse is the high-school kind of 'intermediary model', which imagines that banks lend out the money that people deposit in them. But when a bank creates a mortgage (which is an asset to them), it has to create a corresponding liability (which is the deposit). They can't lend existing deposits out (or any fraction of them), because it would be a liability with a matching liability. This means some surprising things - banks don't actually need any existing deposits at all to lend, and they temporarily create new deposits (which has the same status as 'real' money) when they lend. This money, as well as the debt created at the same time, both disappear as the loan is repaid in equal measure. The way it all works is that because the banks are all transferring a lot of money between themselves, the amount of reserves (and cash, but it's mainly central bank reserves) that they actually need to make payments is only a fraction of the total volume being created and transferred. If they don't have the reserves, they can just borrow them from another bank or the central bank, or on money markets. Of course, it's handy for them for people to deposit money in their bank because it's a cheap way for the bank to get liquidity. This isn't 'fractional reserve' by the way - that comes from the fact that banks in the US are required by the Fed to have a certain minimum amount of central bank reserves (10% of the amount of their deposits). That is just a measure to ensure they have enough liquidity though. The incorrect 'money multiplier model' comes from a misunderstanding of fractional reserve banking. Most countries don't even have a reserve requirement, instead having capital adequacy requirements.
digi_owl 9y ago
Had too look around a bit but indeed chapter 10 on banks and credit talk about how commercial banks effectively print money as they extend loans. Just wish they would drop the whole "patient and impatient agents" stuff. I fear this will be another Keynes where over time orthodox economists will find a way to warp of redefine the text into something that simply restate their old beliefs.

jljljl 9y ago

Is there an alternative view of the consumer that produces useful results?

soVeryTired 9y ago
The one used by advertising: the one that understands something about human nature.
- jljljl 9y ago
  I don’t think advertising really contradicts the model: advertising grows demand for a good by increasing an individuals perceived or realized utility for the product.
  - goialoq 9y ago
    That's the key: that perceived/predicted and realized utility are different, and we focus too much on consumers horrible mismeasure of predicted utility.
  - soVeryTired 9y ago
    But that's part of the problem: utility isn't observable so it's actually very difficult to refute the model. Unless of course you posit a specific functional form for the utility function. Then you'll just have lots of trouble fitting any data you collect.
    - jljljl 9y ago
      I don’t think economists believe there is a specific functional form for the utility function (although it often has certain properies). It’s more just a useful concept for representing customer preferences.

goialoq 9y ago

Hmm? Even among fans of the book, the book's incorrect explanation of money creation is the main criticism: https://mainlymacro.blogspot.co.uk/2017/09/the-core-economicscurriculum-designed.html https://mainlymacro.blogspot.co.uk/2017/09/the-core-economic...

digi_owl 9y ago
That seems to focus on the wrong section. Section 10.8 illustrates how commercial banks create money by lending. What the blog entry you linked to talk about is government deficits, and how the textbook clash with the MMT idea of governments regulating the money supply via expenditure and taxes (effectively creating money as they buy goods and services, and destroy it via taxation).
soVeryTired 9y ago
I was really just referring to the fact that in section 10.8 they ditched the fractional reserve / money multiplier story that you find in eg. Mankiw's book. I honestly don't know enough about government budget constraints to comment on the mainly macro post, or other aspects of MMT in general.
- neffy 9y ago
  The standard fractional reserve/money multiplier story is provably wrong, in several different ways. With a pen and paper for example, work through what happens when loans are repaid with that cascade of banks. They missed a note that money is destroyed when the capital is repaid, and it wouldn't have hurt to discuss loan defaults, but as set out, it is definitely an improvement on the old incorrect description. (Which appears to have originated as a copy and paste error from Keynes original description in the Macmillan report.)

bllguo 9y ago

Hm. Care to qualify your statement? What do textbooks get wrong about money creation?

stephen_g 9y ago
A lot of them use the completely invalid 'money multiplier' model, which doesn't follow double-entry accounting rules. Even worse is the high-school kind of 'intermediary model', which imagines that banks lend out the money that people deposit in them. But when a bank creates a mortgage (which is an asset to them), it has to create a corresponding liability (which is the deposit). They can't lend existing deposits out (or any fraction of them), because it would be a liability with a matching liability. This means some surprising things - banks don't actually need any existing deposits at all to lend, and they temporarily create new deposits (which has the same status as 'real' money) when they lend. This money, as well as the debt created at the same time, both disappear as the loan is repaid in equal measure. The way it all works is that because the banks are all transferring a lot of money between themselves, the amount of reserves (and cash, but it's mainly central bank reserves) that they actually need to make payments is only a fraction of the total volume being created and transferred. If they don't have the reserves, they can just borrow them from another bank or the central bank, or on money markets. Of course, it's handy for them for people to deposit money in their bank because it's a cheap way for the bank to get liquidity. This isn't 'fractional reserve' by the way - that comes from the fact that banks in the US are required by the Fed to have a certain minimum amount of central bank reserves (10% of the amount of their deposits). That is just a measure to ensure they have enough liquidity though. The incorrect 'money multiplier model' comes from a misunderstanding of fractional reserve banking. Most countries don't even have a reserve requirement, instead having capital adequacy requirements.

digi_owl 9y ago

Had too look around a bit but indeed chapter 10 on banks and credit talk about how commercial banks effectively print money as they extend loans. Just wish they would drop the whole "patient and impatient agents" stuff. I fear this will be another Keynes where over time orthodox economists will find a way to warp of redefine the text into something that simply restate their old beliefs.